By Tiernan Ray

Shares of Apple (AAPL) are up $2.77, or half a percent, at $501.45, amidst some encouraging words from the Street about profit margins, despite reports that the company is cutting production of the recently released iPhone 5C amidst what appears to be greater demand for the 5S model. Both went on sale starting late last month.

The Wall Street Journal’s Lorraine Lukreported this morning that Hon Hai Precision, a unit of Foxconn, has had orders for the 5C cut by a third, and Pegatron, another partner, had orders cut by “less than 20%,” citing multiple unnamed sources. Reuters‘s Clare Jim and Paul Carstencited sources confirming the cuts.

None of that is necessarily bad, writes Canaccord Genuity‘s Mike Walkley, who today reiterated a Buy rating on Apple shares, while raising his price target to $580 from $560, citing his survey data that shows both iPhone 5S and, possibly, a newly revamped iPad – which may be unveiled at next Tuesday’s media event — helping to lift average selling prices and consequently margins:

Despite the brighter outlook on pricing, Walkley cut his fiscal 2014 estimates to $190.5 billion in revenue and $46.60 per share in net profit from a prior $190.7 billion and $46.67.

He has heard investors are worried about a drop-off in iPhone sales in the Marchquarter, but believes the situation may be saved by Apple releasing a model of the device using the “TD-LTE” cellular standard for broadband data in China, which could get picked up by China Mobile (CHU):

We anticipate a TD-LTE iPhone announcement before year end and believe China Mobile could sell 10M+ iPhone units in the March quarter. The new sales into China Mobile could somewhat offset seasonal trends in Western markets post the holiday selling season. Therefore, we are modeling 44.6M iPhones in March quarter, an increase of 19% Y/Y. While we believe our 52.5M iPhone unit sales for the December quarter could prove conservative, our March quarter estimates will likely prove aggressive if China Mobile does not launch TD-LTE iPhones for Chinese New Year.

Also today, Deutsche Bank’s Chris Whitmore reiterates a Buy rating on the shares, and a $575 price target, writing that demand for the iPhone has been “robust” and that margins for both models could actually benefit Apple:

Our checks show that iPhone demand remains robust, with stock outs of the iPhone 5S continuing on a global basis. In fact, in the past week, we’ve seen lead times extend in Western Europe, Latin America and Asia-Pac after improving in early October (see charts 2 and 3 below). We believe this reflects ongoing strong global demand beyond the initial launch phase […] We expect solid December guidance due to the combination of strong iPhone demand, the aggressive rollout of new geographies and relatively lean iPhone channel inventory levels exiting the September quarter. Of the metrics, we expect investors to be most focused on Apple’s gross margin guidance. On this score, we believe Apple’s December gross margins could improve on a Y/Y basis (vs. December of 2012) for several key reasons […] The new iPhones have higher margins than the iPhone 5: Last year, Apple suffered poor initial manufacturing yields and high costs ramping the iPhone 5. In addition, most materials costs in the 5S/5C have declined vs. last year. As outlined in our previous note (EE#317: iPhone margin analysis and color from the field, originally published 9/27/13), our analysis suggests that the margins of both the iPhone 5S and 5C have higher margins than the iPhone 5 had at this point last year. As a result, iPhone margins should be up Y/Y […] We expect iPhone revenue to comprise ~65% of December quarter revenue vs ~63% last year. This modest improvement in mix should support ~50bps of Y/Y gross margin improvement, all else equal.

Whitmore expects a beat when Apple reports fiscal Q4 results on October 28th, reporting perhaps $36.9 billion and $8.02 per share in profit versus consensus of $36.7 billion and $7.86. He thinks the company may forecast gross profit margin in the current quarter at least flat with the prior-year period, at 38.5%, if not higher, which he thinks would be a nice surprise to the Street.

He also takes a moment to offer thoughts on how 64-bit computing, which the iPhone 5S has, and which the new iPads may gain, could help Apple in enterprise:

Moving to a 64bit architecture is important to enterprise for several reasons. First, it ‘future proofs’ App development and protects investment for the migration to 64bit computing over time. In short, enabling 64bit allows enterprises to build custom apps for iPads with greatly reduced obsolescence risk. Over time, iPads will incorporate more and more memory (i.e. >4GB). By introducing 64bit today, enterprises will have apps developed to take advantage of the added benefits of 64bit computing in the future. Second, Apple’s latest processor is demonstrating significantly better performance than its prior generation and is approaching the performance specs of the low-end of x86. This added processing power should also support additional iPad App development. Finally, Apple’s ‘productivity Apps’ such as Pages and Numbers will likely be provided as a free download. While this is unlikely to cause most users to move off of Excel and Word, it may entice users in small office/SMB who on the margin would not consider the offering otherwise.

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